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Airline Mergers and Competition: An Integration of Stock and Product Price Effects
Abstract
While research using stock prices has rejected the hypothesis that market power is important in motivating horizontal mergers, studies of airfares find evidence consistent with a dominant role of market power in airline mergers. The author integrates the two lines of research by examining the same set of airline mergers from a capital market viewpoint. Further, he links changes in the stock market to changes in the product market, presenting a dual market perspective. The author concludes that airline mergers result in both increased market power and more efficient operations. The article has implications for antitrust policy. Copyright 1996 by University of Chicago Press.
... Acquisitions are seen as aggressive competitive actions (Adams et al., 2009) that shift a market's competitive structure (Hankir et al., 2011). This shift, even if usually beneficial for all firms, is particularly favorable for the acquirer (Eckbo, 1983;Kim and Singal, 1993;Singal, 1996;Stillman, 1983). It is therefore not surprising that firms are not passive observers of their rival's acquisitions, but instead sometimes actively retaliate against such competitive moves (Berger et al., 2004;Keil et al., 2013;King and Schriber, 2016). ...
... As a result, all remaining firms are able to appropriate more economic value if their pricing power increases (Eckbo, 1983;Stillman, 1983). Kim and Singal (1993) show that while increases in market power should benefit the industry as a whole, firmspecific efficiency gains associated with horizontal acquisitions are more significant (see also Singal, 1996), particularly when the longer-term effects of acquisitions are taken into account (Focarelli and Panetta, 2003). As such, while all firms may benefit from a less competitive market following an acquisition, the acquirer enjoys additional benefits from firm-specific efficiency gains that could disturb an existing mutual forbearance equilibrium, especially if the target firm is relatively large (Hankir et al., 2011). ...
... As such, while all firms may benefit from a less competitive market following an acquisition, the acquirer enjoys additional benefits from firm-specific efficiency gains that could disturb an existing mutual forbearance equilibrium, especially if the target firm is relatively large (Hankir et al., 2011). Thus, although the acquisition of large target firms is often beneficial for all remaining firms in the market due to increased market consolidation, it is likely to be particularly favorable for the acquirer (Eckbo, 1983;Focarelli and Panetta, 2003;Kim and Singal, 1993;Singal, 1996;Stillman, 1983). Thus, interconnected rivals are expected to retaliate despite these industry-wide gains because of their perceived threat to the mutual forbearance equilibrium (Markman and Waldron, 2014). ...
Acquisitions are competitive moves that disrupt an industry's competitive structure. As a result, firms are often not passive observers of their rival's acquisitions, but actively retaliate against such competitive moves. In this study, we explore these dynamics by analyzing one way in which multimarket contact may influence acquisition strategies, namely, the type of targets acquired. We contribute to the acquisition literature by clarifying the role that pre-acquisition competitive interdependencies play in firms' acquisition strategies. Specifically, we suggest that high multimarket contact firms do not necessarily avoid acquisition activity. Instead, these firms are more likely to acquire targets that are less likely to incur retaliation from interconnected rivals. We also explore two important boundary conditions to this relationship: (1) the market's competitive structure and (2) the location of the target firm. Our empirical tests of a sample of 741 bank holding companies from 1995 to 2014 offer support for our hypotheses.
... Knapp (1990) conducts an event study for nine airline mergers proposed in 1986, in which positive abnormal returns for both merging airlines and rival portfolios support the market power hypothesis. Singal (1996) examines 27 airline mergers during 1985-88 and finds support for the market power hypothesis. Using data on the 1986 Northwest-Republic Airlines merger, Hergott (1997) event study finds a rise in market power of the merging airlines through increasing concentration at the airport level. ...
... Under the ST, the CSRC imposed more rigorous limits on the companies' stock price fluctuations (±5%). 5 See Singal (1996) and Hergot (1997) as examples of using short event window to study airline mergers. 6 Cameron and Trivedi (2005, Chapter 6). ...
... 8 The positive stock price reactions for the two merging airlines is consistent with some event studies to analyze airline mergers in the literature (e.g. Knapp, 1990;Singal, 1996;Zhang & Aldridge, 1997). Further, the stock price reactions are consistent with theoretical expectations that firms do not enter mergers unless they expect these to be profit maximizing. ...
This paper proposes a decomposition of sources of gain of airline mergers. Economic analysis of horizontal mergers often attributes the gains of the merger to market power and productive efficiency effects. We adopt a Williamson framework to propose a decomposition analysis quantifying the relative importance of these two effects for airline mergers. First, we use an event study to compute the market power and productive efficiency wealth effects in airline mergers. Second, we use the airline's operating statistics to compute the proportion of profit gain due to market power and productive efficiency. We then apply those proportions to decompose the sources of wealth effects from the event study. In a case study, we apply this methodology to analyze the horizontal merger between China Eastern and Shanghai Airlines in 2009. Our results find that improved productive efficiency contributed about four-fifths to the merged airline's increased wealth, while increased market power contributed about one-fifth.
... Yet, despite the fact that collusion has been shown to occur in regulated industries - Kim and Singal (1993) and Singal (1996) find evidence of collusion following mergers in the airline industry and Sapienza (2002) in the banking industry -the focus of most of the work on rival gains is on unregulated firms 2 . In this paper, we study the causes and effects of mergers in the highly regulated U.S. telecommunications (telecom) industry. ...
... A testable implication of this deregulation is that the effects of collusion should be more evident in the post-deregulation period because regulatory oversight has been diminished (Stillman, 1983). Kim and Singal (1993) and Singal (1996) find evidence of collusion in the airline industry following deregulation. ...
... Studies by Eckbo (1983) and Stillman (1983) do not support the collusion hypothesis as the source of gains in mergers of firms in unregulated industries. Those that do find evidence of collusion study regulated industries after deregulation; Kim and Singal (1993) and Singal (1996) find evidence of collusion following mergers in the airline industry and Sapienza (2002) in the banking industry. We study the telecom industry due to its regulated nature and because it provides a rich setting for the hypotheses tested in this paper. ...
We study mergers in the regulated telecommunications industry to test theories of merger gains. We find that mergers yield positive returns to the combined firms. Because this effect is consistent with the collusion, competitive advantage and anticipation hypotheses, we study returns to rivals to differentiate the hypotheses. Our results indicate that rival firms earn positive abnormal stock returns upon the announcement of an industry merger and that returns exhibit substantial cross-sectional dispersion. Rivals that become targets in subsequent mergers earn significantly greater announcement returns than do subsequent non-targets. Financial characteristics of initial target firms and subsequent targets are statistically indistinguishable. Finally, rival abnormal returns are insignificantly related to market concentration and horizontal vs. vertical deal status. These results are consistent with predictions of the anticipation hypothesis and inconsistent with collusion. Thus, our findings indicate that deregulation did not foster collusion in mergers in the telecom industry but, instead, merger gains are due to merger-induced efficiencies.
... Stillman (1983, p.230) argues that collusion would be less likely in a regulated environment. Indeed, Kim and Singal (1993) and Singal (1996) state that their findings of collusion in the airline industry are due to the deregulated setting that they study. In our analysis, collusion would be more likely in the deregulated 1993 to 2004 period following the passage of the Energy Policy Act. ...
... If federal and state deregulation better enable collusion, we would expect utility prices to be higher after federal deregulation in 1992 and to increase more in those states that allowed deregulation and restructuring. Kim and Singal (1993) and Singal (1996) perform a related analysis in the airline industry. Prager and Hannan (1998) and Sapienza (2002) study banking. ...
... Multiindustry event studies of the rivals of industrial firms report results that are interpreted to be inconsistent with collusion (Eckbo, 1983;Stillman, 1983;Eckbo and Wier, 1985;Fee and Thomas, 2004;Shahrur, 2005). However, single-industries event studies of (formerly) regulated industries such as airlines (Singal, 1996;Knapp, 1990;Slovin, Sushka, and Hudson, 1991) provide results consistent with collusion. Moreover, related single-industry studies of the product price effects of mergers also find evidence consistent with collusion (Kim and Singal, 1993;Prager and Hannan, 1998;Sapienza, 2002). ...
We provide new tests of the synergy and collusion hypotheses of mergers using stock and product price data from the utility industry. Our sample comprises 384 utility mergers in the 1980 to 2004 period. The analysis centers on the Energy Policy Act of 1992 that deregulated the industry and facilitated merger activity. Combined bidder and target returns are positive for the full sample and both before and after deregulation. Rival firms have a positive merger returns in the regulated period, while post-deregulation stock returns to rivals are negative. Horizontal rivals in the same geographic region as the bidder and target have no greater stock returns than rivals not in the same region. Stock returns to rivals at the announcement of withdrawn deals are significantly positive. Product prices at the state level are not increased by either merger activity or greater concentration over time. Firm-level data indicate a significant median product price decline for both the merging firms and their rivals following mergers. The stock price and product price evidence are consistent with the synergy hypothesis and inconsistent with the collusion hypothesis. The results indicate that the greater merger activity that has been facilitated by deregulation has not induced collusive pricing in the industry.
... Further to see the variations in stock price movements, stock price return/(s) has been calculated. Singal (1996), Rosen (2006), Lang et al. (1989), Abhyankar (2005), Agrawal (1992) and Rau and Vermaelen (1998) [27,25,15,1,3,23] advocated that a widely used method to assess the success of a merger is to analyze the firm"s stock prices in the short term and long term and often compare it to an industry and economic benchmark. after the merger announcement) and medium term (2 months before and 2 months after the merger announcement) stock prices of the merged companies. ...
... Further to see the variations in stock price movements, stock price return/(s) has been calculated. Singal (1996), Rosen (2006), Lang et al. (1989), Abhyankar (2005), Agrawal (1992) and Rau and Vermaelen (1998) [27,25,15,1,3,23] advocated that a widely used method to assess the success of a merger is to analyze the firm"s stock prices in the short term and long term and often compare it to an industry and economic benchmark. after the merger announcement) and medium term (2 months before and 2 months after the merger announcement) stock prices of the merged companies. ...
... Market power effects of mergers have been extensively examined in the banking, airline and other industries, and these studies provide a good setting for this paper. While most of this literature concludes that mergers and acquisitions lead to the exercise of market power, usually in the form of unfavourable prices and/or reduced output such as cutting off borrowers (e.g., Kim and Singal, 1993;Singal, 1996;Berger et al., 1999;Sapienza, 2002, Hankir et al., 2011Ryan et al., 2014;Fraisse et al., 2018), there are studies that provide evidence to the contrary (e.g., Focarelli and Panetta, 2003;Shaffer, 2004;Weinberg, 2005;Park, 2009;Coccorese, 2009;Delis et al., 2017). The contradictory results notwithstanding, the majority of the evidence seems to support the conclusion that increase in market concentration more often leads to the exercise of market power in these industries. ...
... The HHI is the most widely used measure of market concentration. Most market power studies, including White (1987), Kim and Singal (1993), and Singal (1996), have used the HHI. The HHI, which measures an industry's concentration in a given geographic market, represents the sum of squared market shares (Giroud and Mueller, 2011) and is given as: ...
Stock exchange mergers can lead to increased efficiency; however, increasing levels of concentration can potentially lead to the exercise of market power. We investigate the market power repercussions of stock exchange mergers and find that the industry’s concentration levels have not significantly increased and the concentration levels do not influence exchanges’ profitability in the post-merger period. The profitability of the merging exchanges in the post-merger period is largely influenced by efficiencies in revenue generation and cost management. The absence of evidence that stock exchange mergers lead to the exercise of market power suggests that there does not appear to be an immediate need for regulatory agencies to be overly concerned about mergers among stock exchanges leading to the exploitation of market power to the detriment of consumer welfare.
... Finally, the inconclusive findings on the effectiveness of financial hedging implies the necessity of further empirical investigations to obtain a definitive conclusion for the aviation industry. Carter et al. (2006), Weiss and Wruck (1998), Alam and Sickles (1998), Singal (1996), Hersch and Mcdougall (1993), Ramanchi et al. (2017), Nwude et al. (2016), Kizildag andGoh (2011), Hofer andEroglu (2010), Thomas et al. (1995), Özcan (2019 The moderating role of firm characteristics (e.g. size, age, etc.) on the association between sustainability activities and firm value and performance have also been explored. ...
To date, there has been limited research undertaken into firm value determinants in the air transport industry, one of the most essential sectors for global business. In view of this, in this study, we review and synthesise the literature that focuses on the value of firms in this sector and discuss conceptually and empirically the determinants influencing airlines’ stock values. Our main objective is to widen our understanding of the current state of research on the firm value of air transport companies. Using the systematic literature review (SLR) approach, we classify 173 papers published from 1984 to 2021. We find considerable changes in academic interest in the topic over the time period analysed, especially as a consequence of crisis-induced market crashes. In addition, we classify the main research themes relating to airlines’ market value, identify gaps, and introduce potential future research avenues in this area. Among the themes identified, the adjustment in the industry-level factors such as alliances, market structure and competition were the most common source of fluctuations in airlines’ stock value. However, we find shifting to sustainability initiatives and its consequence for stakeholders’ value as one of the most discussed topics in this context. The trend has gained attention since early 2020 due to the emergence of the Covid-19 pandemic as companies are looking for green and sustainable ways to protect the value in crisis time. Our findings assist transportation researchers and executives in addressing major value drivers of airline firms.
... Since this literature does not account for divestitures, it cannot determine whether anticompetitive potential exists but is mitigated through divestitures. A number of studies that examine post-merger output prices conclude that horizontal mergers result in higher output prices due to a reduction in competition (see Barton and Sherman, 1984;Borenstein, 1990;Kim and Singal, 1993;Singal, 1996;Prager and Hannan, 1998;Kwoka and Shumilkina, 2010). Again, these papers do not consider the role of divestitures. ...
We show that divestitures accompanying horizontal mergers affect both the market power potential and the competitive efficiency of merging firms. Stock price reactions of customer firms are more positive (hence divestitures are more effective in mitigating the market power impact of the merger) if merging firms divest assets to buyers outside the industry rather than existing rivals. This result is stronger when the merging industry is more concentrated and when powerful customers are absent. Stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers.
... Some researchers have claimed that all M&As have one goal in common: to create a synergy that raises the value of the combined companies at a level higher than their sum (Singal, 1996;Weston et al., 2004). In a successful merger, a combined company performs better after the merger than either company has done beforehand (Filipović, 2012;Weston et al., 2004). ...
Purpose: This study confirms earlier findings that differences between merger and acquisition (M&A) participant firms are a hurdle for successful mergers, and shows that merger outcomes can also be affected by the post-merger integration duration (PMID).
Design/methodology/approach: An experimental research on distinct cultures developed within experimental pre-merger subject groups is employed to compare pre- and post-integration performances.
Findings: This study finds that firm distance (i.e., inherent differences between pre-merger firms) negatively influences merger success; no significant relationship between firm distance and PMID exists; and PMID is positively related to merger success. Specifically, a slower integration minimizes conflicts between merger partners, enhances trust-building, and reduces the disruption of existing resources and processes in both firms, which may benefit M&As. By contrast, a fast integration that shortens the overall integration process may discourage the combined entity from recognizing the intended synergy quickly.
Originality: While M&As may better facilitate cost-effective expansion of business offerings than building capabilities internally, they can require considerable time, preventing many firms from realizing their intended outcomes. Nevertheless, less attention has been focused on PMID and its influence on M&As. This study is the first to use experimental research to examine the effects of PMID on merger success.
Research implications: This study has important strategic implications for managers in business firms that intend to acquire external capabilities for business growth.
... Some studies analyze the stock market responses to totally unexpected events like air crashes and terrorist attacks in which airlines are involved [ (Bosch et. al., 1998), (Carter and Simkins, 2004), (Drakos, 2004)] whereas another body of literature examine the effects of airline mergers and acquisitions, which are less unpredicted compared to air crashes and terrorist attacks [ (Knapp, 1990), (Singal, 1996), (Zhang and Aldridge, 1997), (Friesen, 2005), (Flouris and Swidler, 2004)]. But event-study methodology for regulatory changes may possess some problems. ...
The inclusion of international aviation emissions into the European Union Emission Trading Scheme starting from 2012 is expected to bring additional costs to flights having either origins or destinations at a European Union airport. In turn, this should bring new costs to airlines. The aim of this paper is to analyze how financial markets reacted to the official announcements on this regulatory change. Our findings, using an event-study methodology and employing a sample of 20 European airlines’ stocks, reveal that the stock markets tend not to take these regulatory changes into account in the valuation of the European airlines’ stocks. We also document that the magnitude of the reaction of low-cost airlines is not statistically significant than that of full-service network airlines’ reaction.
... The general conclusion is that synergy gains generated by M&As represent quasi-rents from scarce resources owned throughout the target industry. A number of finance studies (e.g., Eckbo, 1983;Stillman, 1983;Barton and Sherman, 1984;Borenstein, 1990;Werden, Joskow, and Johnson, 1991;Kim and Singal, 1993;Singal, 1996) suggest the anticompetitive significance of horizontal mergers. However, it is difficult to separate the net effect of cost reductions from revenue increments based on the combined abnormal returns. ...
We review the key differences between the finance and real estate literature on mergers and acquisitions (M&As) from 1980 to 2016. We summarize the differences in M&As between REITs and general corporations. First, REIT mergers are larger than general mergers. In particular, the bid levels of REITs are consistently higher than those of standard business mergers. Second, REIT acquisitions involve fewer all-stock bids and fewer all-cash deals. Third, the deal sizes with mixed payments are much higher than with other payment methods. Fourth, there are very few hostile takeovers in the REIT market but the proportion of hostile takeovers in REITs does not differ from conventional firms. Fifth, the average deal value of REIT private-to-public takeovers is higher than public-to-public takeovers and the average deal value of REIT public- to-private takeovers is higher than private-to-private or other-private M&As. Finally, researchers have not examined the use of REITs that could help move real estate assets into better managed and use form; thus this will provide fruitful research ideas in the future.
... The general conclusion is that synergy gains generated by M&As represent quasi-rents from scarce resources owned throughout the target industry. A number of finance studies [such as Eckbo (1983), Stillman (1983), Barton and Sherman (1984), Borenstein (1990), Werden, Joskow, and Johnson (1991), Singal (1993) andSingal (1996)] suggest the anticompetitive significance of horizontal mergers. However, it is difficult to separate the net effect of cost reduction from revenue increment based on the combined abnormal returns. ...
This paper reviews the key differences between the finance and real estate literature
on mergers and acquisitions (M&As) from 1980 to 2016. We summarize the
differences in M&As between REITs and general corporations. First, REIT mergers
are larger than general mergers. In particular, the bid levels of REITs are consistently
higher than those of standard business mergers. Second, REIT acquisitions involve
fewer all-stock bids and fewer all-cash deals. Third, the deal sizes with mixed
payments are much higher than that with other payment methods. Fourth, there are
very few number of hostile takeovers in the REIT market but the proportion of hostile
takeovers in REITs does not differ from that in conventional firms. Fifth, the average
deal value of REIT private-to-public takeovers is higher than that of public-to-public
takeovers and the average deal value of REIT public-to-private takeovers is higher
than that of private-to-private or other-private M&As. Finally, we would have
suspected that research would have examined the use of umbrella-REITs that could
help move real estate assets into better managed and use levels form. No study has
looked at this issue as yet and this will provide fruitful research ideas in the future.
... The academic literature on M&As in the airlines has generally focused on market power (e.g. Hüschelrath and Müller, 2015;Singal, 1996;Zhang, 2015) and shareholder value creation or destruction (e.g. Bouwman et al., 2009;Fuller et al., 2002;6 Cross-border M&As are rare due to regulatory restrictions of airline ownership in most countries around the world, as well as air services agreements (ASA) that limit flying rights between countries to national registry of aircraft and/or designated national carriers. ...
... The academic literature on M&As in the airlines has generally focused on market power (e.g. Hüschelrath and Müller, 2015;Singal, 1996;Zhang, 2015) and shareholder value creation or destruction (e.g. Bouwman et al., 2009;Fuller et al., 2002;6 Cross-border M&As are rare due to regulatory restrictions of airline ownership in most countries around the world, as well as air services agreements (ASA) that limit flying rights between countries to national registry of aircraft and/or designated national carriers. ...
This paper analyses the unit cost effects of mergers and acquisitions (M&As) using linear, quadratic, and translog cost functions. In addition to a basic unit cost model we specify separate models for distress, profit, relative size, and cost difference, among the merging firms. We use a sample of 19 horizontal M&As in the international airline industry and data spanning from 1980 to 2012. Our models show that M&As do not affect unit costs in a significant way, unless the relative size difference of the merging firms is large, in which case we detect an increase in unit costs.
... The academic literature on M&As in the airlines has generally focused on market power (e.g. Hüschelrath and Müller, 2015; Singal, 1996; Zhang, 2015) and shareholder value creation or destruction (e.g. Bouwman et al., 2009; Fuller et al., 2002; Manuela and Rhoades, 2014; Moeller et al., 2005). ...
This paper analyses the unit cost effects of mergers and acquisitions (M&As) using linear, quadratic, and translog cost functions. In addition to a basic unit cost model we specify separate models for distress, profit, relative size, and cost difference, among the merging firms. We use a sample of 19 horizontal M&As in the international airline industry and data spanning from 1980-2012. Our models show that M&As do not affect unit costs in a significant way, unless the relative size difference of the merging firms is large, in which case we detect an increase in unit costs.
... Although many stock market studies analyze mergers in different industries, some of them concentrate on mergers that occur in the same industry. Singal (1996), for example, studied a sample of fourteen US airline mergers, and found that positive returns appeared in the cases where mergers induced large market concentration increases, but that they tended to be negative when mergers were relatively small and likely to generate cost reductions because of the more efficient use of common airports. ...
The aim of this chapter is to survey the basic economic literature concern-ing the antitrust analysis of mergers in the USA. That is a relatively difficult task, since the USA has a long history of antitrust merger law, and it is also the country where the economic analysis of mergers began.
... In the case of short-term financial performance, Singal (1996) reports that the two-day abnormal returns were positive for target and acquired firms, contrary to the finding that acquiring firms earn zero or negative returns (Malatesta, 1983;Varaiya, 1986). Hanlon (2007) argues, however, that the instability and volatility of the airline industry make almost any consolidation that promises to reduce costs or lower capacity appear attractive to airline investors. ...
This paper examines the short-term stock performance of Southwest Airlines and AirTran Airways using time series data consisting of daily and cumulative abnormal returns ± 60 trading days around the merger announcement and merger completion dates. The impact of Southwest's announcement to acquire AirTran is positive. The daily abnormal returns of Southwest and AirTran, using the S&P 500 as index, are highly significant on the merger announcement date. The impact of the merger completion is mixed, however. Southwest's share price drifted lower up to the merger date, underperforming the S&P 500, while the share price of AirTran generally drifted higher in a very narrow range. Southwest and AirTran, nevertheless, outperformed the AMEX Airline Index, suggesting that the higher fuel prices at the time of the merger may have influenced investor reaction to the merger, resulting in lower share prices of major airlines. The beta of Southwest improved after the merger announcement and completion of the merger, suggesting shareholder confidence in the merger and in Southwest's financial performance, at least in the short-term.
... In the case of short-term financial performance, the share prices of acquiring and target firms show abnormal returns before and after the effective merger date (Israel 1991;Lang 2000). Moreover, the two-day abnormal returns are positive for target and acquired firms (Singal 1996). The instability and volatility of the airline industry, however, make most M&As that promise to reduce costs and increase profits appear attractive to airline investors (Hanlon 2007). ...
This article examines the announcement and post-merger effects of three US airline mergers—America West and US Airways, Delta and Northwest, and United and Continental. The time series data consist of daily and cumulative abnormal returns using the Standard and Poor’s 500 as the benchmark index. The event study methodology uses ±60 trading days around the announcement and merger dates. The share prices of United and America West increased while Delta’s decreased due to the slowing US economy at the time of its merger with Northwest. The impact of the merger announcement on target airlines is positive except for Northwest due to the weakening demand for air transport as the US economy faltered at the time of its merger with Delta. The share prices of acquiring and target airlines increased around the merger completion date, suggesting that new information is available as the merger nears completion.
... Published studies using event studies to analyze the effects of mergers are numerous. Knapp (1990) and Singal (1996) utilize the event study (and other methods) to analyze the impact of proposed mergers in the airline industry. These studies generally find that the mergers enhanced efficiency. ...
Financial event studies using daily stock returns are frequently employed in the analysis of mergers to estimate the sign and magnitude of stock movements to particular merger announcements. A common method of conducting the event study is least squares regression with dummy variables. Daily stock returns, however, are typically non-normally distributed, potentially rendering the hypothesis tests on the least squares coefficients invalid if based on asymptotic critical values. We present evidence on the non-normality of daily stock returns and the consequences of it on critical values using a bootstrap technique. We find that non-normality can lead to substantial departures from the asymptotic critical values and large asymmetries. Both under- and over-rejection of the null hypothesis are possible depending on the particular form of the non-normality.
... Aside from Chatterjee's (1986Chatterjee's ( , 1992 studies, for a long time Eckbo's approach to consider rival returns was usually employed as a secondary method for industry-based studies with additional non-stockbased data (e.g. Hosken and Simpson, 2001;Singal, 1996). Yet, a spate of recent literature -mostly, but not only, in finance -has re-embraced the approach to consider rival effects while taking a pan-industry perspective (Banerjee and Eckard, 1998;Duso et al., 2007;Fee and Thomas, 2004;Molnar, 2007;Shahrur, 2005;Song and Walkling, 2000). ...
We examine the recent rise of institutional investment in the single-family home rental market and its implications for renters’ welfare. Using institutional mergers to identify local exogenous variation in institutional landlords’ scale and market share, we show that rents increase in neighborhoods where both merging firms owned properties (i.e., overlapped neighborhoods) relative to other nonoverlapped neighborhoods. Meanwhile, the crime rate also significantly decreases in overlapped neighborhoods after mergers. Our findings suggest that while institutional landlords leverage their market power to extract greater surplus from renters, they also improve the quality of rental services by enhancing neighborhood safety.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
We study the effectiveness of divestitures as a merger remedy. We show that divestitures are more effective in mitigating the market power impact of mergers if the merging firms divest assets to buyers outside the industry rather than existing rivals. Divestitures are also more effective as merger remedies when the merging industry is concentrated and when powerful customers are absent. Notably, stock price reactions of the acquirer and rivals suggest that firms are more concerned with maintaining a competitive edge relative to each other than gaining market power relative to customers.
The ultimate goal of antitrust enforcement is to maximize the surplus consumers enjoy by enhancing production efficiency and eliminating market power. Previous literature focuses on the average net wealth effects on merging firms and their stakeholder firms and reports evidence of efficiency gains while no evidence of market power in horizontal mergers. In this paper, we examine how efficiency gains distribute between the merging firms and their customer firms. We find a significant negative relation between the combined abnormal returns on the merging firms and those on their customer firms, demonstrating a wealth transfer effect. Such a negative relation is more pronounced when market power is likely to be more intensive. On average, the merging firms gain, and their customers do not lose. Our results suggest that market power allows merging firms to withhold merger gains that would have been passed to the downstream under perfect competition and prevents customers from enjoying the whole consumer surplus. Distributive inefficiency exists in horizontal mergers.
The first part of this chapter focuses on the impact of state control via industry regulation on firms’ M&A performance. The literature on regulatory economics points to more negative than positive impacts of regulations on firms. Firms in regulated industries have higher costs of capital and spend more organisational and financial resources for regulatory compliance and lobbying activities. According to the annual Global Competitiveness Report of the World Economic Forum, Vietnam ranks relatively low due to the burden of government regulation. We find that M&A of Vietnamese firms in regulated industries generated negative abnormal returns to shareholders; however, firms with the government as the largest shareholder bore less of such impact. Our finding implies that having significant state ownership helped firms better cope with constraints typically found in regulated industries.
This paper examines the motives and effects behind the horizontal merger between China Eastern and Shanghai Airlines in 2009. We develop testable hypotheses, incorporating into a unified framework the two merging airlines, their domestic and international competitors, and relevant airports along the supply chain. We employ an event study methodology and show that domestic competitors gain whereas international competitors lose. Our results suggest that the sources of gain for the merging firms are market power in domestic markets and efficiency improvement in international markets. Further, as a hub for the merged airline, Shanghai Airport experienced positive abnormal returns. Our results do not support the hypothesis that the merged airline gains countervailing power towards airports. Our event study findings are robust to alternative estimation periods and samples, and are consistent with analyst forecasts and long-run operating performances.
The article estimates enforcement activities effects of the Federal Antimonopoly Service in oil products markets. The article analyzes the impact on petrol and diesel fuel markets of two types FAS Russia measures: measures related to the primary detection of antitrust laws violation signs, and measures applied when the violation fact has already been reliably established. The research point is based on the concerns about the negative impact on the companies of posting news of showing interest on the part of antimonopoly authorities with no evidence proving true law violation at the period of publication. To estimate effects on shares prices of large vertically integrated companies in the oil industry we used the event study method. The analysis sample included events that occurred with Russian oil companies from 2013 to 2019. The analysis showed that the effects based on the influence of detection signs of violation and establishing the violation fact of antitrust laws differ both in their intensity and in the direction of influence. It is also proved that the actions of antimonopoly authorities don’t create significant indirect costs of reducing the company's market value.
This study explores the effect of asset specificity on a target firm's value in a merger. Using US merger data, I show that, when their industry experiences a negative cash flow shock, target firms that consist of more industry-specific real assets receive a lower merger premium than do those consisting of more generic assets. Results also suggest that the asset specificity discount in the target return is more pronounced if target firms are financially distressed. However, the negative value effect of asset specificity is mitigated in the presence of financially unconstrained industry rivals who place high value on the targets' assets, compete for the targets, and, thereby, are more likely to acquire the targets. Overall, the results are consistent with the hypothesis that asset specificity of a firm is an important determinant of the firm's value.
Logistic service providers are facing significant challenges in recent years due to intensified competition and ever-increasing customer expectations for cohesive high-standard services at low cost. To cope with these developments many companies aim for external growth to realize operational efficiencies and exploit productive opportunities of new markets and diversified services. Accordingly, 2015 has even become the most active year for mergers and acquisitions in logistic service industry. However, studies examining the post-merger performance effect and its determinants are scarce. Consequently, this paper takes up this issue by analysing a sample of 826 transaction announcements taken place between 1996 and 2015 and their performance effect in terms of short- and long-term abnormal shareholder returns. The results reveal, that although overall transactions exhibit significant positive abnormal returns, post-merger performance for the acquiring companies differs considerably according to the logistic services offered. In the short-term trucking, railway, 3PL and air cargo companies experience significant positive abnormal returns of about 0.6%–2.6%, while sea freight carriers realize only marginal effects and CEP companies do even not show any significant reaction. In the long-term, railway and 3PL companies realize a significant abnormal return of about 20%–24%, while trucking, sea freight and air cargo carriers do not exhibit significant returns and CEP companies do even experience significant losses of about −17%. Overall, diversifying transactions of established full-service providers outperform focus-increasing transactions of specialized operators.
Logistic service providers are facing significant challenges in recent years due to intensified competition and ever-increasing customer expectations for cohesive high-standard services at low cost. To cope with these developments many companies aim for external growth to realize operational efficiencies and exploit productive opportunities of new markets and diversified services. Accordingly, 2015 has even become the most active year for mergers and acquisitions in logistic service industry. However, studies examining the post-merger performance effect and its determinants are scarce. Consequently, this paper takes up this issue by analysing a sample of 826 transaction announcements taken place between 1996 and 2015 and their performance effect in terms of short- and long-term abnormal shareholder returns. The results reveal, that although overall transactions exhibit significant positive abnormal returns, post-merger performance for the acquiring companies differs considerably according to the logistic services offered. In the short-term trucking, railway, 3PL and air cargo companies experience significant positive abnormal returns of about 0.6%–2.6%, while sea freight carriers realize only marginal effects and CEP companies do even not show any significant reaction. In the long-term, railway and 3PL companies realize a significant abnormal return of about 20%–24%, while trucking, sea freight and air cargo carriers do not exhibit significant returns and CEP companies do even experience significant losses of about −17%. Overall, diversifying transactions of established full-service providers outperform focus-increasing transactions of specialized operators.
We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on-time performance (OTP). We find that airline mergers have minimal negative impacts on OTP, and likely result in long-run improvements due to efficiencies. Importantly, we show that this finding is not driven by post-merger changes in price that could affect OTP. Consequently, at least in the case of airlines, policymakers should not, as a rule, fear the negative quality effects of mergers. © 2017 The Editorial Board of The Journal of Industrial Economics and John Wiley & Sons Ltd
Die Logistikindustrie erlebt in den letzten Jahren eine besonders starke Zunahme von Fusionen und Akquisitionen (M&A). Insbesondere seit Beginn der 1990er Jahre ist die Entwicklung einer regelrechten Fusionswelle festzustellen. So machen die Logistikdienstleister nicht nur durch eine wachsende Anzahl von M&A-Transaktionen, sondern insbesondere durch eine steigende Transaktionsgröße der M&A auf sich aufmerksam. Beispielsweise gehören die Übernahmen des Flughafenbetreibers BAA durch Ferrovial, die Übernahme des Logistikdienstleisters Exel durch die Deutsche Post, die Übernahme von Patrick durch Toll Holdings sowie die Übernahme von P&O durch AP Moeller Maersk zu den größten Multimilliarden-Dollar-Transaktionen der Jahre 2005 und 2006. Aber auch eine Vielzahl kleinerer Transaktionen, die wenig Schlagzeilen machen, tragen zu der Fusionswelle bei. Eine Abschwächung dieser Entwicklung ist nicht zu erkennen.1
Im Rahmen dieses Kapitels werden die zentralen Begriffe der vorliegenden Arbeit definiert und ihre Merkmale beschrieben. Außerdem werden die Motive erläutert, die zu M&A fuhren. Hierbei wird insbesondere auf die Besonderheiten in der Logistikindustrie eingegangen, um mögliche Erklärungsansätze für die vorherrschende Konsolidierungsphase zu identifizieren. Auch soll die Zielsetzung von M&A in dem für die Arbeit relevanten Kontext klar gestellt werden, um den Transaktionserfolg bestimmen zu können. Das Kapitel schließt mit einer Bewertung der Zielerreichung basierend auf bisherigen empirischen Studien zum Erfolg von M&A ab.
We show that partial equity ownership of a rival firm reduces product market competition. Acquisitions of a minority equity stake in rival firms are followed by higher output prices and higher industry profits, particularly when barriers to entry are high. Stock-price reactions of nonparticipating competitors of the acquirer and target are positive while announcement returns of customer firms are negative. Moreover, announcement returns of rivals are significantly higher and those of customers weakly lower when the customer industry is more competitive and when the acquirer and target are larger firms.
Data, as supplemental material, are available at https://doi.org/10.1287/mnsc.2016.2575.
This paper was accepted by Amit Seru, finance.
Delta Air Lines acquired an oil refinery in April 2012 as a strategic move to hedge against higher fuel prices. Our paper analyzes the impact of the oil refinery acquisition, a backward integration strategy, on the airline's financial and operational performance, for the period Q1 2010 to Q2 2015, and we argue that the resource dependence theory best explains Delta Air Lines’ acquisition. The methodology involves descriptive statistics and short-term stock performance as well as an econometric model that estimates the impact of the oil refinery acquisition on Delta Air Lines' net income. The data set consists of quarterly financial and airline operations metrics data. The results indicate that it is too early to ascertain whether Delta Air Lines' oil refinery acquisition has any positive impact on its financial performance since the variable of interest is insignificant in predicting the airline's net income. Despite the apparent lack of positive impact of its oil refinery acquisition, however, the stock market has rewarded Delta Air Lines' strategy resulting in its share prices outperforming the S&P 500 and the XAL, an index of major airline stocks, in the 60-trading day period following the announcement of its acquisition.
This dissertation examines two important issues of mergers and acquisitions. The first chapter structurally estimates acquiring managers' private benefits in takeovers. It shows that acquiring managers overvalue targets by 63% of target capitalization. As a result, acquiring managers pick targets that provide no synergy gains in 17% of takeovers and overbid by 13% of target capitalization in the rest. Private benefits sought by acquiring managers amount to $9 million on average and vary substantially across firms. Agency problems are more severe for larger bidders that have greater free cash flows and chase larger targets. However, an independent board can reduce private benefits and mitigate agency conflicts for acquiring firms.
The second chapter examines the impact of financial sponsor competition on corporate buyers. It shows that corporate acquirers who purchase targets that financial buyers also bid on outperform corporate acquirers who buy targets bid on by corporate firms only. Deals characteristics, acquirer abilities, and observable target characteristics cannot explain this difference in returns. Corporate acquirers have higher returns when they follow a first bid by a financial buyer rather than a first bid by another corporate buyer. The results suggest that financial buyers identify targets with high potential for value improvement and winning corporate bidders are competent in exploiting this potential.
This paper examines whether and how increased entry threat drives industry merger activity. We use the reduction in import tariffs as a natural experiment of exogenous increase in competitive intensity and study its effect on merger and acquisition (M&A) decisions. Our results indicate that competition drives M&As towards more efficient resource allocation. We first document that increased entry threat intensifies takeover activity, consistent with the argument that M&As are an efficient reaction to economic shocks. We also find that, after import tariff reductions, the selection of targets outside the industry becomes more efficient and industry rivals react more positively to those deals, suggesting that efficient non-horizontal deals signal the existence of investment opportunities outside the industry for the industry peers.
Deregulation is endogenous. It is preceded by poor industry performance and is predictable with performance variables. These results imply that merger activity following deregulation should be systematically related to poor pre-deregulation industry performance. Consistent with this hypothesis, I find that post-deregulation mergers serve a contractionary role. Bidders and targets in post-deregulation mergers are poor performers prior to the merger and operate with significant excess capacity. Consistent with the hypothesis that post-deregulation mergers represent a form of exit, the frequency of cash and bankruptcy mergers is significantly higher following deregulation and the offer premium is significantly lower.
This chapter surveys the recent empirical literature and adds to the evidence on takeover bids for U.S. targets, 1980–2005. The availability of machine readable transaction databases have allowed empirical tests based on unprecedented sample sizes and detail. We review both aggregate takeover activity and the takeover process itself as it evolves from the initial bid through the final contest outcome. The evidence includes determinants of strategic choices such as the takeover method (merger v. tender offer), the size of opening bids and bid jumps, the payment method, toehold acquisition, the response to target defensive tactics, and regulatory intervention (antitrust), and it offers links to executive compensation. The data provides fertile grounds for tests of everything ranging from signaling theories under asymmetric information to strategic competition in product markets and to issues of agency and control. The evidence is supportive of neoclassical merger theories. For example, regulatory and technological changes, and shocks to aggregate liquidity, appear to drive out market-to-book ratios as fundamental drivers of merger waves. Despite the market boom in the second half of the 1990s, the proportion of all-stock offers in more than 13,000 merger bids did not change from the first half of the decade. While some bidders experience large losses (particularly in the years 1999 and 2000), combined value-weighted announcement-period returns to bidders and targets are significantly positive on average. Long-run post-takeover abnormal stock returns are not significantly different from zero when using a performance measure that replicates a feasible portfolio trading strategy. There are unresolved econometric issues of endogeneity and self-selection.
This paper looks at the reaction by industry insiders, industry analysts and competing firms, to the announcement of M&As that took place in the European Union financial industry in the period 1998-2006. Analysts covering firms involved in an M&A transaction do not significantly alter their recommendation. This is consistent with the hypothesis that the transaction on average is "fairly priced" and that stock market prices reflect all relevant information on the assets. We also find that the correlation between excess returns for merging and competing firms is positive and, in some cases, significantly higher for domestic mergers than for international deals. This is consistent with the idea that domestic deals are more likely to have a negative impact on industry competition.
This study analyses the largest banking merger in the Middle East: Emirates Bank International merged with National Bank of Dubai to form the Emirates NBD. The study examines the effect of the merger on the wealth of shareholders and on the operating performance of Emirates NBD. The result shows that during the year surrounding the post-merger period, stock prices increased thereby enhancing the shareholders wealth and the operating performances also improved after the merger.
We study the competitive effects of five liquidations and six mergers in the domestic U.S. airline industry between 1995 and 2010. Applying fixed effects regression models, we find that route exits due to liquidation lead to substantially larger price increases than merger-related exits. Within the merger category, our analysis reveals significant price increases on all affected routes immediately after the exit events. In the medium and long-run, however, realized merger efficiencies and entry-inducing effects are found to be strong enough to drive prices down to pre-exit levels.
We examine how mergers affect quality provision by analyzing five U.S. airline mergers, focusing on on-time performance (OTP). We find mild evidence that merging carriers’ OTP worsens in the short run. However, we find consistent evidence that in the long run, their OTP improves. Subsequent analyses indicate efficiency gains, not reduced load factor or passenger volume, underlie our long-run result. Additional analyses of quality provision (e.g., flight cancellations) show no long-run worsening in these areas by merging firms. In the long run, airline mergers do not result in worsening performance, at least along several measures, and provide some time-saving efficiencies.
Using a sample of 324 acquisition deals originated by nonstate-owned enterprise (SOE)-listed companies to acquire nonSOE private firms in China, we find that politically connected firms are more successful at acquiring high-quality local businesses than firms without political connections. The capital market gains from these acquisition activities, as measured by cumulative abnormal return (CAR), are significantly higher in both the short term and long term for politically connected firms, than for nonconnected firms. Investors holding stocks of politically connected companies that conduct acquisitions also gain more in both the short and long term, as measured by buy-and-hold return (BHAR). Additionally, the market performance of firms with higher level of political connections is significantly better than that of others with lower level of connections. The preferential policies and a certain range of freedom local government can exert to acquisition counterparties may explain the results. This study contributes to the merger and acquisition (M&A) literature by examining the impact and mechanism of political connections on acquiring companies in the context of a transition economy, China, and discloses the importance of political connections even for market-oriented deals such as M&As between nonSOE counterparties. Our study also finds that corporate governance (CG) positively moderates the role of political connections of acquirer in acquisitions.
We test whether airline consolidations generate monopoly profits by examining returns to listed carriers around horizontal airline-acquisition bids and evaluating effects of industry concentration on share-price reactions. Under Civil Aeronautics Board (CAB) regulation, returns to targets, bidders, and rival carriers are positive functions of changes in concentration implied by bids. Changes in concentration after deregulation have no positive effect on carrier returns. These results support Jordan's (1970, 1972) hypothesis that CAB activities fostered carrier collusion. There is no evidence of monopoly gains from carrier consolidations after deregulation.
Using standard event study methodology, we examine a challenged horizontal merger known ex post to be anticompetitive. The event study shows no evidence that the merger was anticompetitive. This result casts doubt on the ability of event studies to detect anticompetitive mergers.
Several recent articles have studied the competitive effects of horizontal mergers by examining rival firms' stock price reactions to the merger announcement and subsequent antitrust challenge. These articles have consistently failed to find any evidence of anticompetitive effects. This article considers two alternative explanations for the previous findings, and it sheds some new light on the issue by presenting a case study of the merger that resulted in the formation of the Northern Securities Company in 1901.
Ordinary Least Squares regression ignores both heteroscedasticity and cross-correlations of abnormal returns; therefore, tests of regression coefficients are weak and biased. A portfolio ordinary least squares (POLS) regression accounts for correlations and ensures unbiasedness of tests, but does not improve their power. The authors propose portfolio weighted least squares (PWLS) and portfolio constant correlation model (PCCM) regressions to improve the power. Both utilize the heteroscedasticity of abnormal returns in estimating the coefficients; PWLS ignores the correlations, while PCCM uses intra- and inter-industry correlations. Simulation results show that both lead to more powerful tests of regression coefficients than POLS. Copyright 1992 by American Finance Association.